Refinancing a first and second home mortgage into one and 1098 entering

[muppet103]

I refinanced two loans (one on my first home and one from my second) into a single loan on my primary residence in 2020. Would I still combine all my 1098s together (in the step for "Multiple 1098s related to a Refinance done in 2020" that suggests "grab a calculator"), or is this a problem because I got cash out for my primary residence to pay off the loan for the second home? Ultimately, it combined two loans into one, but the two loans were one for my primary residence and one for my second home vs. two loans on my primary residence. The instructions on this one aren't clear, but say to add all the 1098s up. I just want to be sure that paying off one of those loans with the refinance is still ok to do this if that second loan was on a second residence.

[DaveF1006]

 It depends. To clarify, how many 1098's have you received?

[Edited 03-02-2021|11:17 AM PST]

[Mike9241]

to be qualified residence interest it must be acquisition debt (AD) for the taxpayer's main or second home.

the debt must be secured by each of the homes for which AD was incurred.  Refinancing of AD is AD only to the extent it does not exceed the principal outstanding on the loan immediately before the refi.  this would seem to mean that any refi done where the balance exceeds the remaining balance on the mortgage on the home refi'd and secured by that home is not AD and the interest wouldn't be deductible.  however, it would seem if both homes secure the debt then as long as the amount of the refi doesn't exceed the total of the remaining balances on the separate mortgages all the debt would be AD and the interest would be deductible.  

[muppet103]

I have three total: two from each of the two mortgages from each property and one for the new refinanced mortgage on my primary residence. I basically refinanced my house and the total debt from the sum of the first two mortgages that I collapsed into one are more than what the refinanced mortgage is for (so I didn’t invest the cash into anything else)

[KrisD15]

Be aware that in order to deduct the Home Mortgage Interest, the loan needs to be secured by the home. Since you combined the loans, only the portion attributed to the house that secures the loan counts. 

For example, say you bought a house for 200,000 and a second for 100,000.

When you have a balance of 150,00 and 75,000 the first house is worth more, so you take a new mortgage out for 225,000 on the first house and pay off the original 2 loans. 

You can only claim interest on part of your new loan. The new loan is on your first home which you paid 200,000 for, but only had a balance of 150,000 when you refinanced; Therefore the amount of debt you can claim interest on for that loan is 150,000.

The interest on the 75,000 is not deductible because it is not on a loan secured by the second house. 

In this example, only 67% of the interest is considered Home Mortgage Interest. 

According to the IRS:

“Refinanced home acquisition debt.

Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt.”

IRS Pub 936

[muppet103]

Thank you for your help. I interpret that section slightly different than you do and I'm wondering where you got the example in your response from as I don't see that specifically in here. The paragraph below says "the balance of the old mortgage principal". Considering that there were two mortgage principals and the addition of those two is higher than my new mortgage principal, it seems that this could definitely still apply to my situation. Since I don't have any additional debt (compared to the combination of the two old mortgage principals).  Both previous loans were secured by the individual properties. My new loan is also secured by my home (and, if it matters, the amount of the principal is the same or lower than my initial loan plus major improvements we put into our primary home). Am I not interpreting this correctly? The paragraph below doesn't seem to clarify whether it's one mortgage refinanced into one mortgage).

The paragraph says: 

Refinanced home acquisition debt.

Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt.

[ReneeM7122]

It doesn't matter that the amount of the principal is the same or lower than my initial loan plus major improvements we put into our primary home, because that is part of your basis, not your loan.  It comes into play when you sell the house, not when you do your taxes from year to year.

For tax purposes, you still go by the 1098 forms and you should combine them as follows:

What do I do if I have multiple 1098s from refinancing my home debt?

If your total home debt is under $375,000 ($250,000 for married filing separate) there is nothing new for you to do in 2020. Enter each 1098 as you normally would.

Home Debt Over $375,000

Under tax law, you are limited on the amount of home interest you can deduct. The limit is based on the loan amount and date of the origination of debt. We want to make sure we calculate this correctly for you. 

If you refinanced last year, you’ll have a Form 1098 from your previous lender and one from the lender you refinanced with. You’ll need both forms. 

Follow these steps to enter your mortgage information:

1. Gather all of your 1098 forms related to your refinance (the form from your original lender and the form from your new lender)
2. Grab a calculator and add together the box 1 amount from each form. Enter the total in TurboTax as Box 1 Mortgage interest.
3. Add the Box 5 amount from each form and enter the total as Box 5 Mortgage insurance premiums. (If you weren’t required to pay mortgage interest, these boxes will be blank on your forms and you won’t enter anything.)
4. Add the property tax paid from each form and enter it in the Property (real estate) taxes box.

Next, finish adding info for boxes 2, 3, 7, and 11 using Form 1098 for the original loan.

@muppet103

[muppet103]

Thank you. So this is my impression as to what I should be doing as well, but I think I've gotten the opposite advice on this same thread which says that since I'm combining two mortgages on two separate properties into one, I should only be using the previous loan amount for my primary residence and not adding to it the 1098 for my second home. I don't really understand how that would be the case since I had two separate principals (each secured by the associated property; first and second home) and then combined them into one (now secured by my primary residence). But I want to be sure I'm not including any mortgage interest that isn't deductible. The new debt is over $375,000, so I think I should be doing the method you listed below with all three 1098s (the original 1098s from each property and the new refinanced loan 1098). Does that sound correct? Is there any reason I should not do this?

[WendyN2]

Yes, from @ReneeM7122 's posted instructions, that is what you should do. Make sure you follow all of the instructions however as this particular section of the program (most all tax prep programs this year, truly) is very "touchy" about you accidentally missing checking even the most minor of a box that requires checking off in your situation. 

[muppet103]

Apologies for so many questions on this, but it appears that when I do this, even if I refinanced late in the year (which I did), it still proportions the amount of deductible interest based on the original mortgage of my primary home, not the interest that I paid on the second home for the vast majority of the year. Is this really correct? So it's looking at my original primary home loan debt, comparing to my new debt for my primary home, and basically ignoring all the debt of my second home and assuming that's not deductible at all even though 11 of the 12 months I paid that separately before combining my loans into one. Is that really correct? Or when I do the step of filling in the boxes of 2, 3, 5, and 7, should I be putting the combination of loans from first and second homes? I'm greatly confused why refinancing two loans into one at the end of the year means the majority of the interest that I paid for the majority of the year on my second home wouldn't be deductible anymore.

[DaveF1006]

It sounds like your mortgage is being limited. My suggestion is to enter your original 1098, exactly the way it is listed. Combined the remaining two 1098's into one 1098 entry. Make sure in the second 1098 that you record the mortgage balance as  0 since these are refinances of the original mortgage balance amount. 

I think this should clear up your original entry.  As long as your mortgage balance is below $750K, you should be able to claim all your interest paid in the original loan and the refinanced loans.

[muppet103]

@DaveF1006 Thank you.

To make sure I understand what you're recommending:

1) Enter my second home 1098 exactly as is, and then indicate the remaining balance is 0 (which I think comes as a later question about that mortgage being paid off in 2020)

2) Combine the two 1098s for my primary home together in one entry (as that was the home I refinanced)

The question later that is tripping me up is whether I took out cash. The answer is yes, but this cash was used to pay the second home loan off entirely. Is that why it's limiting it (and is that what should be happening)? The mortgage balance is well-under $750K

Does this mean for this year (and future years) that because I refinanced with cash out on my primary home to pay off my second home (which again, the total principal on the new loan is slightly less than the combined principal of the two homes before refinancing as I brought a little cash to refinance) that I can no longer deduct all of the interest moving forward? I understand what TurboTax is saying as far as refinancing, but it seems to make the assumption that it's one home being refinanced as opposed to two homes being refinanced into one loan. That is what is completely throwing me off as to what to enter.

[DaveF1006]

Yes, if you took the money out of the refinance of the first home to pay for the second home, the mortgage interest is not deductible for that lender.  You can verify that in this link. Based on what you told me, here is the best way to report these 1098's.

1. Enter the 1098 for your original in your primary residence loan exactly the way it is recorded, including the mortgage balance.
2. Enter the second 1098 separately. Put 0 as the original mortgage balance, but record the remainder as it is listed on your form. Be sure to enter the information regarding how you handled the loan proceeds. Remember, this interest is not deductible.  
3. Enter the second home 1098 with 0 as the mortgage balance.  Here you will indicate that this home was sold.
4. This should result in a deduction for your original mortgage in your primary, and an interest deduction for your secondary home that was just paid off.
5. Let me know how this worked out.

[muppet103]

@DaveF1006, I wasn't able to follow these directions for two reasons:

1) There isn't anywhere to mark the original mortgage balance at all, so I couldn't enter $0

2) For the second home, I couldn't enter $0 for outstanding mortgage principal (Turbotax won't let me put 0 in there) and nowhere that I saw to mark it as sold

Because of this, I think I have to go with the method of adding all three 1098s together, which is still incredibly confusing to me as to why that would be, but I don't see any other way around it. It still feels like I should be combining the primary home 1098s into one and separately filing the second home (with what is on the form I got, which would show outstanding principal, but from everything I'm reading on this thread, it doesn't sound like that is correct either.

[DaveF1006]

Yes, add the 1098's together and use the latest loan balance as the mortgage loan amount outstanding.